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'The Dabhol tariff is not the highest in the country'

In June 1999, when the Dabhol Power Company's president and chief executive Ram Srivastav quit suddenly, US-based energy major and diversified transnational Enron Corporation, chose Neil McGregor as his replacement.

His brief: Ensure that the most controversial foreign investment project in post-reforms India is back to business, quietly. Immediate task: ensure Phase-I is fully operational and viable, and Phase-II construction sticks to schedule. (Click on photographs of the project for bigger images.)

For a man who had just a year's experience at Enron, the task was as challenging as it was daunting. There were tricky politicians, angry environmental activists, volatile Swadeshi proponents, dynamic human rights activists, overbearing bureaucrats, an almost bankrupt business partner and policy-unsure governments to contend with.

One-and-a-half years down the line, McGregor has learnt not only to be cool-as-a-cucumber even when the volcano of controversy erupts but to interact with important ministers to press home the company's stance and to handle the hyperactive media with finesse.

In the context of the outbreak of fresh hostilities between the DPC and its detractors over the Maharashtra State Electricity Board's non-payment of dues, McGregor shared his perceptions with Associate Editor Y Siva Sankar.

Financial newspapers in India have commented editorially that the Maharashtra government should scrap the Dabhol power project. Do you agree with this viewpoint?

The Dabhol project has brought tangible benefits to Maharashtra and so we naturally do not agree with that point of view.

Since 1999, in the state of Maharashtra, the Dabhol Power Company's plant has helped alleviate the state's power shortage, currently estimated at 2,000 mega-watts during peak times.

The Dabhol project will eventually generate 2,184 MW of power and use Liquefied Natural Gas, an environmentally cleaner and less expensive fuel, when Phase II of the project is commissioned at the end of 2001.

There are also several other important benefits that the Dabhol power plant brings to both the country and the local Dabhol community in Maharashtra.

For instance:

• Dabhol has to date contributed over Rs 16 billion to the national and state exchequers and has brought in foreign direct investment of over Rs 100 billion into the country.
• DPC provides the power quality to maintain the integrity of the grid, necessary for computers and related equipment used in India's growing IT industry.
• DPC has, by building the facilities, provided valuable employment to area residents. DPC contractors on the site currently employ approximately 15,000 workers. A modern hospital, school and other community services have been provided to area residents by DPC.

It is said that the DPC/Enron India Limited would claim huge damages in compensation if the Dabhol project is scrapped. However, it is believed that these claims for billions of dollars, if any, would be legally untenable. What is your stand on this?

We are not in a position to comment on speculation.

The claim of loss of business opportunity, if any, is also said to be untenable because Enron has not lost out on opportunities elsewhere because of the Dabhol project. Please comment.

We agree and have nothing further to add.

What do you think led to the present impasse/MSEB default?

MSEB's financial predicament is fundamentally attributable to a multitude of factors, relating to transmission, distribution, arrears etc.

We believe a lasting solution to MSEB's financial predicament is required and needs to involve all stakeholders concerned such as state and central governments, political parties, labour unions, NGOs and others.

Industry experts say the choice of fuel for the DPC is a factor that made power expensive. Will the DPC review the use of certain fuels like naphtha?

While liquid fuel might be costlier than coal, it is much more environmentally clean. Moreover, it is important to point out the cleaner, safer and cheaper LNG will be used as a fuel for the plant once Phase II comes on stream.

Owing to the use of LNG, the Dabhol tariff is expected to drop a further 20 per cent to 25 per cent (assuming 90 per cent offtake, current foreign exchange rates and international crude oil prices remaining within a price range of $ 21 to $ 28 per barrel).

There is a view that the Power Purchase Agreement is flawed and against the interests of Maharashtra. Please comment. Will you lower pricing for MSEB's benefit?

The PPA is a legally binding document, which was negotiated in good faith and with full understanding of its provisions, taking into consideration the interest of all parties concerned.

We have lived up to terms of the agreement. Unfortunately, factors beyond our control, such as dispatch quantity (which is controlled by the MSEB), fuel costs and taxes/duties have resulted in a short-term increase in tariffs.

Additionally, various factors in Maharashtra, such as industrial growth rate in the state and the reform effort in the power sector, have not progressed as quickly as originally anticipated.

We have been working with MSEB, the Dabhol lenders and other appropriate authorities to resolve issues of concern to MSEB. We are confident that all stakeholders concerned will make every effort to find a lasting and equitable solution to this important issue.

Anti-Enron groups have always maintained that multinational corporations would end up bankrupting Indian establishments like MSEB, in the field of essentials like power and food. Do you see substance in the view that these groups now stand vindicated?

Absolutely not.

MSEB's financial predicament is fundamentally attributable to a multitude of factors, relating to transmission, distribution, arrears, etc. The cost of power from Dabhol compares favourably with any other liquid fuel based power plant built at the same time, even by the public sector.

The Dabhol tariff is not the highest in the country.

The average Dabhol tariff since commissioning (May 1999 to October 2000) has been Rs 4.94/kwh (kwh = kilowatt-hour). And that too because only 60 per cent of Dabhol's plant capacity has been utilised.

The contracted level of utilisation (90 per cent) would have resulted in a tariff of only Rs 4.02/kwh. Post completion of the entire project, when the fuel of choice will be LNG, the tariff is expected to drop a further 20 per cent to 25 per cent, assuming prevailing international fuel prices would remain within a price bandwidth of US $ 21 to 28 per barrel.

In fact, Maharashtra faces a peak shortage of 1500 MW to 2000 MW daily, but the available power from DPC is not despatched even though there are regular blackouts across the state

Of late, the media have been describing the Dabhol project variously, from Maharashtra's standpoint: "bungling", "self-inflicted injury", "wound", etc. Please comment.

The Dabhol project has brought tangible benefits to Maharashtra and so we naturally do not agree with that point of view.

To repeat what I said earlier, since 1999, in the state of Maharashtra, the Dabhol Power Company's plant has helped alleviate the state's power shortage, currently estimated at 2000 MW during peak times.

The Dabhol Project will eventually generate 2184 MW of power and use LNG, an environmentally cleaner and less expensive fuel, when Phase II of the project is commissioned at the end of 2001.

There are also several other important benefits that the Dabhol power plant brings to both the country and the local Dabhol community in Maharashtra. I've already listed them above.

The MSEB has reportedly taken a decision to buy power from DPC only as and when required because "we cannot afford uneconomical power generated from DPC". Please comment.

We believe MSEB is following the MERC Merit Order Despatch guideline.

There is talk of renegotiations between Maharashtra and the DPC. Are you willing to have another round of talks with the state government? Or, are you in a mood to go in for international arbitration?

Although we are comfortable with the contractual safeguards in our existing PPA, we also want to maintain positive relationships with the government of Maharashtra and the Government of India.

Consequently, we are always willing to discuss issues with our various stakeholders. However, this does not necessarily mean that we will be renegotiating the contract.

As per the renegotiations in 1995, the DPC had agreed to pass on all substantial savings to the MSEB. So will the DPC pass on the savings from the lower interest rate at the financial closure of Phase-II, to the MSEB? Will you agree to reduce capacity charge?

Any savings in costs that are passthrough will be passed on to MSEB. DPC has consistently been concerned about the situation. Our consistent efforts proposing a cut in interest rates by Indian lenders to DPC, has resulted in institutions like IDBI, IFCI, SBI, ICICI and Canara Bank having accepted DPC's proposal to lower the loan rates.

We fully expect to pass through resulting net cost reductions to MSEB. It has been our continuing endeavour with various stakeholders and officials of the government of Maharashtra and the Government of India to help resolve these issues in ways that are in the best interest of the government, consumers and investors.

Do you think it is possible to restructure the DPC debt by taking advantage of lower interest rates internationally and thus reduce capacity charge for even Phase-I?

We are open to discussing ways to lessen the impact of the current high price of electricity.

Would you try to keep DPC's variable cost of electricity stable by working out an expected average price of fuel for the year in advance?

Fuel cost being a passthrough, it has received our constant attention. Working on the basis of expected average fuel price is not a viable option, as market price movements would still spring surprises.

Hedging is a much better strategy to follow. In mid-2000, when fuel prices were at lower levels, we attempted hedging and forward trades but prevailing RBI policies did not permit it. After prices went up, it was no longer a viable option.

Given current low naphtha prices, a hedging mechanism should be explored to mitigate future risk arising out of price volatility.

Unfortunately, under current RBI policies, hedging is not allowed for rupee-based transactions in petroleum products. Therefore, sourcing naphtha domestically, as the government has now asked us to do, again exposes MSEB to volatility.

You have said a national market should be created where power can be freely bought and sold. Do you think this will make power cheaper/costlier?

One of the ultimate objectives of power reform should be deregulation of power commodity pricing. Deregulation of power commodity pricing will inject competition in the market, which will ultimately result in a more efficient and effective electricity system, and a beneficial impact on prices.

What are the actual Dabhol Power Project costs? There is a view that the DPC padded up costs to negate perceived risks like bankruptcy of MSEB. Please comment.

The Dabhol project is a total investment of US $ 3 billion; of which $ 1 billion is equity and $ 2 billion debt. Project costs were computed on realistic assumptions of risk, and no costs were 'padded up'.

I can assure you that the project has been developed in an ethical fashion and in accordance with the highest standards of business practice.

Photographs: Y Siva Sankar

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